Chapter 11

1. Chapter 11 Pricing Issues in Channel Management

2. Major Topics for Ch. 11 • Pricing • Major Considerations • Channel Structure and Pricing* • Channel Pricing Guidelines • (Manufacturer) Pricing as a Channel Incentive* • Gray market and free riding problems in marketing channels**

3. 1. The Pricing Ingredient • Price: the ultimate measure of value of a product/service. • Valuation: simultaneous appraisal by sellers & buyers for economic and psychological worth of market offerings.*

4. The Importance of Pricing 11 Pricing decisions cause top-level marketing executives more concern than any other strategic marketing decision area. Pricing is viewed as having a more direct link to the firm’s bottom line.

5. 2. Major Considerations:Anatomy of Channel Pricing Structure 11 Channel participants each want a part of the total price sufficient to cover their costs and provide a desired level of profit. cf) Retail Pricing  Whoelsale Pricing

6. An Example of Channel Pricing for Guitar String Manufacturer $2.50 Manufacturer cost Wholesaler Manufacturer price $3.40 Retailer Wholesale price $5.00 Retail price 7.50 Customer

7. 3. Channel Structure and Pricing Issues* 11 • Intensity and Pricing  Channel Control Issue • Level and Pricing*  Channel efficiency Issue / Channel control issue • Ownership/function and Pricing •  Channel flexibility Issue / Channel control issue

8. 3-1. Channel Pricing in Practice* 11 • Channel Level and Pricing  Affects channel efficiency/channel control issue • When using a Direct Channel: Transfer Pricing issue  Four options • When Using an Indirect Channel: Double or triple Markup • Market Power and Pricing: Who has more bargaining power?

9. Channel Manager’s Role 11 Major areas of consideration in a manufacturer’s pricing decision Internal cost considerations Target market considerations Competitive considerations Channel considerations Channel manager must focus on the channel considerations and work to incorporate them into the firm’s pricing decisions

10. Channel Manager’s Role 11 Have channel members’ viewpoints on pricing issues included as an integral part of the manufacturer’s price-making process Such action anticipates and hopefully avoids problems that may arise after pricing decisions have taken effect Ex) Rubbermaid versus Wal-Mart

11. 4. Channel Pricing Guidelines* 11 Why? 1. To help those involved in pricing decisions to focus more clearly on the channel implications of their pricing decisions To provide general prescriptions on how to formulate pricing strategies that will help promote channel member cooperation and minimize conflict

12. Profit Margins 11 Guideline #1: Each efficient reseller must obtain unit profit margins in excess of unit operating costs. OR Channel members who believe that the manufacturer is not allowing them sufficient margins are likely to seek out other suppliers or establish and promote their own private brands.

13. Different Classes of Resellers 11 Guideline #2: Reseller margins should vary in rough proportion to the cost of the functions the reseller performs. Do channel members hold inventories? Do they make purchases in large or small quantities? Do they provide repair services? Do they extend credit to customers? Do they deliver? Do they help train the customers’ sales force?

14. Rival Brands 11 Guideline #3: At all points in the vertical chain (channel levels), prices charged must be in line with those charged for comparable rival brands.* • Channel managers should attempt to weigh any margin differentials between their own and competitive brands in terms of what kind of support their firms offer and what level of support they expect from channel members. • When to Offer Higher Margin than Competitors’ ? • When to Offer Lower Margin than Competitors’ ?

15. Special Arrangements 11 Guideline #4: Special distribution arrangements should be accompanied by corresponding variations in financial arrangements. The margin structure should reflect any changes in the usual allocation of distribution tasks between the manufacturer and the channel members.

16. Conventional Norms in Margins 11 Guideline #5: Margins allowed to any type of reseller must conform to the conventional percentage norms unless a very strong case can be made for departing from the norms.* Exceptions are possible if they can be justified in the eyes of the channel members. However, it is the job of the channel manager to attempt to explain to the channel members any margin changes that deviate downward from the norm.

17. Margin Variation on Models 11 Guideline #6: Variations in margins on individual models and styles of a line are permissible, but they must vary around the conventional margin for the trade. Channel members are often amenable to accepting the lower margins associated with promotional products so long as they are convinced of the promotional value of the product in building patronage.

18. Price Points 11 Guideline #7: A price structure should contain offerings at the chief price points, where such price points exist. Price points are specific prices, usually at the retail level, to which consumers have become accustomed. Failure to recognize retail price points can create problems for the manufacturer as well as its channel members if consumers expect to find products at particular price points and such products are not offered.

19. Product Variations 11 Guideline #8: A manufacturer’s price structure must reflect variations in the attractiveness of individual product offerings. If the price differences are not closely associated with visible or identified product features, the channel members will have a more difficult selling job.

20. Guideline Caveat 11 There Is No Guarantee Particular circumstances and situations exist in which these guidelines will not apply or will be irrelevant.

21. 5 & 6: Other Channel Pricing Issues 11 • Exercising control in channel pricing* • Changing price policies • Passing price increases through the channel • Using price incentives in the channel* • Dealing with the gray market & with free riding*

22. Exercising Control in Pricing 11 Because channel members typically view pricing as the area over which they have total control. . . First: Rule out any type of coercive*approaches to controlling channel member pricing policies. Second: The manufacturer should encroach on the domain of channel member pricing policies only if the manufacturer believes that it is in his or her vital long-term strategic interest to do so. Finally: If the manufacturer believes that it is necessary to exercise some control over member pricing, he or she should do so through “friendly persuasion.”

23. Changing Price Policies 11 Changes in manufacturer pricing policies or related terms of sale cause reactions among channel members. Channel members fear such changes because they have become accustomed to the strategy, or their own pricing strategies may be closely tied to those of the manufacturer. Ex) Recent development

24. Passing Price Increases Through the Channel 11 Strategies for channel members to use in order to avoid simply passing along price increases through the channel: First: Manufacturers should consider the long- and the short-term implications of such increases versus maintaining the current prices. Second: Manufacturers should do whatever possible if passing on the price increase is unavoidable. Finally: Manufacturers could change their strategies in other areas of the marketing mix to help offset the effects of such increases.

25. Using Price as Incentives in the Channel* 11 Difficulties in gaining strong retailer acceptance and follow-through on pricing promotions. Ex) Pass-through issue • Possible Solutions: • • Make pricing promotions as simple and • straightforward as possible. • • Design price-promotion strategies to be at least as • attractive to retailers as they are to consumers. • From Purchase-based to Sales-based Incentive

26. Gray Market & Free Riding* 11 Gray Market The sale of brand-name products at very low prices by unauthorized distributors or dealers Free Riding Describes the behavior of distributors & dealers who offer extremely low prices but little service to customers • Essence of the problem: • Gray Market: Price gap between different channels • Free riding: Gap between channel tasks and incentives Channel design decisions that result in closely controlled channels and selective distribution as well as changing buyer preferences may help limit the growth of the gray market and free riding.